Price search, consumption inequality, and expenditure inequality over the life-cycle

Yavuz Arslan, Bulent Guler and Temel Taskin

No 886, BIS Working Papers from Bank for International Settlements

Abstract: In this paper, we differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life-cycle model. With this extension, households can pay lower prices for the same consumption good if they allocate more time for price search. We first analytically show that under very general conditions, poorer (in both income and/or wealth) households search more and pay lower prices compared with wealthier ones. As a result, consumption inequality is smaller than expenditure inequality, and the gap between them increases over the life-cycle. Next, we quantify these mechanisms by calibrating our model to the US data. We find that the life-cycle increase in consumption inequality is about 30 percent lower than the increase in expenditure inequality. We also show that the availability of a price search option provides a large insurance mechanism against adverse income shocks and increases the welfare of a new born by 3.9 percent in consumption equivalent terms.

Keywords: consumption inequality; price search; incomplete markets; life-cycle models; partial insurance (search for similar items in EconPapers)
JEL-codes: D10 D91 E21 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-09
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: PRICE SEARCH, CONSUMPTION INEQUALITY AND EXPENDITURE INEQUALITY OVER THE LIFE ‐CYCLE (2021)
Working Paper: Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle (2016)
Working Paper: Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle (2014)
Working Paper: Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle (2012)
Working Paper: Price search, consumption inequality, and expenditure inequality over the life cycle (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:886

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